Live in One State and Work in Another: How Taxes Are Handled

Living in one state while working in another presents unique tax challenges, especially as remote work and cross-border employment opportunities grow. Understanding the tax implications of such situations is essential.

Tax Residency

Tax residency determines where you must pay taxes when living in one state and working in another. Residency is generally based on where you maintain your primary home and spend most of your time, with each state having its own criteria. For example, California classifies you as a resident if you are there for more than a temporary purpose, while New York applies a 183-day rule alongside domicile considerations.

Residents are typically taxed on all income, while nonresidents are taxed only on income earned within the state. Without proper planning, this can lead to double taxation. Many states offer credits for taxes paid to other jurisdictions, but these rules can be complex.

If you move between states during a tax year, you may qualify as a part-year resident. This requires allocating income between the states to comply with their respective tax laws. For instance, moving from Illinois to Texas mid-year means reporting income earned as an Illinois resident separately from income earned as a Texas resident.

Nonresident Filing Requirements

When working in a state where you do not reside, understanding nonresident filing requirements is crucial. States generally require nonresidents to file tax returns if they earn income sourced within their borders, such as wages or rental income. For example, if you live in New Jersey but work in New York, you must file a New York nonresident tax return.

Each state sets its own thresholds for when nonresidents must file, often based on income levels. For instance, New York requires nonresidents to file if their New York-source income exceeds $8,000 in 2024. Compliance involves keeping detailed records of income and deductions for the nonresident state. Taxpayers may need to apportion income based on days worked in each state or by following state-specific allocation formulas.

Reciprocity

Reciprocity agreements between states simplify tax obligations for individuals living in one state and working in another. These agreements allow residents to pay income tax only to their state of residence, bypassing nonresident state tax requirements. For instance, Virginia residents working in Maryland benefit from such an agreement by filing solely in Virginia for wage income.

When a reciprocity agreement exists, employees submit a non-residency certificate to their employer to ensure only their home state tax is withheld. Employers must understand which states have these agreements to manage payroll correctly and comply with tax codes.

Allocating Income

Accurate income allocation is essential when navigating taxes across state lines. States may have different rules for allocating stock options, bonuses, or other performance-based compensation. Properly distinguishing between income taxable in your resident state and nonresident state is critical.

Maintaining detailed records of work history and income sources throughout the tax year is necessary for accurate reporting. For example, if you earned a bonus while working remotely from a different state, you may need to allocate it based on where the work occurred.

Tax Credits

Tax credits help prevent double taxation when living in one state and working in another. Many states offer credits for taxes paid to other jurisdictions, allowing residents to offset their home state tax liability. However, these credits are often capped at the amount of tax that would have been due if the income were taxed solely in the resident state.

For example, if you live in Pennsylvania and work in New Jersey, Pennsylvania typically provides a credit for taxes paid to New Jersey on income earned there. Claiming this credit requires filing both resident and nonresident returns and providing documentation, such as the nonresident state’s tax return and proof of payment.

Timing of tax payments can also affect the credit. Underpayment of taxes to the nonresident state may result in penalties or interest, which are not eligible for credit in the resident state. Consulting a tax professional or using tax software can help ensure compliance and maximize these credits.

Withholding Obligations

Withholding obligations are critical when working across state lines, as they determine how taxes are paid throughout the year. Employers generally withhold state income taxes based on the work location. For instance, if you live in Connecticut but commute to Massachusetts for work, your employer withholds Massachusetts state income tax.

Remote work arrangements complicate withholding, especially when employees split time between multiple states. Some states, like New York, apply a “convenience of the employer” rule, taxing remote work performed outside the state if deemed for personal convenience rather than employer necessity. Employees in such situations may need to adjust withholding by submitting updated forms to their employer.

Employers must manage the complexities of multi-state withholding, including registering with tax authorities in multiple states and issuing W-2s that reflect income and taxes withheld for each state. Regularly reviewing pay stubs and working with payroll departments can help individuals ensure their withholding aligns with their actual tax liability, avoiding surprises during tax season.